Posted on February 10, 2014 by
Strata Termination: New Laws for Redevelopment
The NSW State Government Strata Title Law Reform position paper (Paper) sets out a wide range of proposed amendments to current strata legislation. You can view the complete paper here. The sleeper issue for the new legislation will be the proposal to allow a strata scheme to be terminated on a 75% vote of the owners. This has been reduced from the 100% vote now required.
I have commented previously on the issues relating to termination and the options pursued in different jurisdictions apart from Australia. You can see my previous comments here. The Paper (page 20 and following) proposes a six step process for collective sale and renewal.
1. Vote to ‘opt in’ to sale/renewal process
50% of owners must first decide to formally consider a proposal. That vote can be held anytime before stage 3 set out below. If half the owners are not interested, it doesn’t progress.
I am assuming that the vote is taken on the unit entitlement of the scheme, not a show of hands, and that it requires 50% of the total owners’ corporation numbers, not just those who turn up when the resolution is put. Watch out for the detail on this.
2. Initiation of sale/renewal proposal
A formal proposal needs to be put to the strata committee (the new proposed name for the Owners Corporation Executive). If the committee sees merit, it calls a general meeting. If the committee fails to call a meeting, the members favouring the redevelopment can force one if they have 25% support of lot owners.
3. Formation of strata renewal committee
If the general meeting supports it (and at this stage, it appears that the proposal only requires a 50% vote to go ahead) a ‘strata renewal committee’ is formed. This is where matters become more serious. The committee can appoint professional advisers, lawyers, valuers, agents and accountants to assist. Presumably the legislation will authorise the committee to expend Owners’ Corporation funds on the investigation.
But what will they investigate? The model assumes that some outside third party (a developer?) will prepare a proposal which the committee will then assess. Interestingly when the paper enumerates the ‘professional advisers’ who the renewal committee appoints, there is no mention of architects, planners and builders. Is this because it is expected that those experts will be approaching the strata scheme with the proposal from an external proponent?
This suggests that the strata renewal committee itself is not likely to be putting together its own proposal for renewal, but rather accepting or negotiating a deal with some external third party.
The strata committee will then be required to inform all of the owners and residents about the investigation of the plan.
4. Development of strata sale/renewal plan
The Paper is very sparse with detail. Stage 4 tells us that the strata renewal committee will develop a plan. Prescribed matters will need to be addressed: chiefly, how much will each lot owner receive from a collective sale. Apparently sufficient detail will be given to allow each owner to make an informed decision.
The assumption appears to be that this will be a sale outright to a developer, rather than a plan developed by the owners themselves.
5. Consideration of strata sale/renewal plan by owners
This is where the the 75% vote enters the discussion. The final plan will be presented to the owners and mortgagees who will have a minimum of 60 days to consider the proposal and seek independent advice. If a vote is taken to progress the matter, the vote is void if action hasn’t commenced within 12 months.
6. The Strata Commissioner
If the resolution is passed by less than 100%, but more than 75%, it appears that the minority can appeal the decision to the Strata Commissioner. Note that this is not a Senior Member of the Consumer, Trader and Tenancy Tribunal, which deals with most current strata disputes: this will be an officer of the Land & Environment Court of NSW. The Paper doesn’t disclose if the Strata Commissioner will be a judge or a commissioner of the Court. The Strata Commissioner will assess whether the process has been followed fairly. It is implied that the initial stages will be done by way of a compulsory conciliation similar to a section 34 conference in class 1-3 litigation before that court.
What powers the Court will have are not set out in the Paper. Will the Strata Commissioner assess hardship? Will she/he review commercial terms and the adequacy of the deal? Or, as in Singapore, will the Commissioner merely check that all the procedural steps have been traversed?
Matters for discussion: what type of renewal?
From the limited amount of material in the Paper there appear to be three types of possible ‘renewal plan’.
Outright sale: Perhaps the simplest option, and from reading the Paper this is the option I believe the Government favours. A developer reviews the existing scheme, its land and its zoning; assesses the development potential; and makes an offer to buy out the scheme, calculating how much each owner would receive for their unit. The developer is then free to redevelop, making a profit or loss independently of the former owners.
The advantage of this type of plan is certainty. If an older scheme is reaching its ‘use by’ date, a developer may make a proposal based on what he or she can make if the land is sold, demolished, and a new scheme is built. This is the simpler, and safer, plan for owners.
The argument for the strata owners will be over the price offered, and the owners’ views about the on-going maintenance costs. They will be thinking: Do we sell and start again somewhere else, or do we keep putting more into the Administration and Sinking funds?
Significantly in an outright sale the outgoing owners will have no ongoing responsibility.
The Strata Redevelopment Scheme: This is more complex. The developer offers a chance to knock down and rebuild. Strata owners invest the value of their current strata unit into a variety of property joint venture. Each current owner gets a predesignated share which may transfer into a new unit in the redeveloped scheme, and possibly a percentage of the profit realised by the developer when the new units are sold.
This makes the home unit owner into a type of guarantor to the redevelopment. If all goes well the unit owner gets a new unit (newer, of greater capital value possibly with lower maintenance costs) and perhaps some profit.
If it does not go well, the unit owner is an investor in a property development scheme. Losses may follow.
Perhaps there is a hybrid of this and the previous option, for example, a sale of the unit to the proponent, with an option to buy a new unit in the redevelopment at a discounted price.
Renewal of the existing strata only: Much of the incentive for a change in the voting entitlements to terminate strata schemes comes from the development lobby. See for example the Property Council of Australia paper ‘Strata Title Renewal’ from 2009.
The Council describes the current laws requiring a 100% vote to terminate and renew as ‘The Strata Title staightjacket….One dissenter can frustrate the will of everyone else.’: page 5. You can see the full submission from the Property Council here.
Developers assume that zoning laws have changed to allow more units to be built in the same location, the increase allowing the owners to rebuild and pay for the renewal by a sale of the increased yield in units.
But what happens where the strata scheme is in desperate need of redevelopment but the zoning hasn’t changed? What if a 12 unit scheme is in an area where you can still only build 12 units?
Presumably the ‘strata renewal plan’ will be an entirely different proposition. Such a proposal would require all owners to contribute funds to the demolition and rebuilding of the strata.
What happens if the owners, or some of them, can’t pay for the renewal? Presumably the renewal committee will come in with a finding that each owner has to fork out $300,000 or so each as their contribution to rebuilding. How does the legislation force an owner to pay up, especially if their unit is their only asset?
Many units are owner occupied by retirees and people who don’t have access to a spare half a million dollars or so to redevelop their property. Paying the mortgage is burden enough. Do they just sell out? And if so, who buys a unit in the expectation that they will have to pay an additional amount for the redevelopment?
These are the questions which the Paper not only does not answer, it fails to ask them in the first place.
Mortgagees and Banks
Significantly, and correctly, the Paper indicates that mortgagees will have a say in the voting for a renewal plan. How mortgagees figure in the 75% vote is not spelled out. The ramifications for financing of strata schemes is significant.
For example, the big four banks are reluctant to lend against Company Title units. This is because the Company, unlike the Strata Scheme, has the power to refuse to register a mortgage. Hence, it is more difficult to fund a Company Title purchase. As a result Company title units are estimated to be valued at 15 to 20% less than an equivalent strata titled unit.
If strata laws change so that the decisions of others can impact on how you deal with your own property, banks and lending institutions may devalue how they view strata title. The right to terminate an entire scheme on a majority vote may be a necessary evil in many cases, but there is no doubt that it constitutes a new exception to infeasibility of title.
If a bank can’t be certain how long the strata unit will be around, if its existence can be changed by the majority vote of neighbours, will banks still see home units as ‘bricks and mortar’ security, or a type of superior share holding? Will banks lower the LVR (loan to valuation ratio), meaning that they will lend less on a home unit due to the fact that the unit may be subject to a compulsory strata renewal plan?
Significantly, in the dozens of submissions made to the Department of Fair Trading when it undertook its call for comment to the strata law review in September 2012 there is not one from a major bank. As we come closer to a strata amendment White Paper I suspect that the banks will take a greater interest.
There is no doubt that there needs to be a mechanism to allow older strata schemes to be terminated and renewed more readily than is the case at present. The Paper gives the green light to a mechanism that the development lobby has long wanted, namely termination on a 75% vote.
Yet important questions remain which the Paper does not resolve. There is no mention of any objective criteria for why the strata should be terminated. On what the Government has put forward, it appears that it is legitimate to call for termination simply because a majority want it, presumably because owners can potentially make more money from the termination.
There is no ‘trigger’ for a redevelopment that requires the strata renewal committee to consider whether the current scheme is faltering. The Paper gives no guidance on when a scheme should be terminated.
It is true that under the current laws strata schemes that desperately call out for termination and renewal can be thwarted by a single vote of a reluctant owner. However, the proposal in the Paper, if not properly qualified, opens the way for strata home units to be nothing more than a curious type of investment commodity which may not be good for housing policy in NSW.
We all await the detailed White Paper, and the devil in the detail that usually comes with it.